In
an editorial this week, acclaimed oil market expert Gary Shilling
stood by a prediction he made in August 2015 that oil prices would
collapse to $10 per barrel citing higher than expected North American
fracking outputs and OPEC’s refusal to limit production.

Two
separate US government watchdogs are outlining problems with the
engines used in their F-35 jet fighters - one finding the systems
unreliable and another citing dozens of violations in its quality
assurance inspection.

This
February, the oil market analyst’s prediction seemed prescient as
the world’s energy industry faced the single greatest market
collapse in history with oil prices coming off a 2008 high of $147.27
down to a measly $26 per barrel. At the time, Saudi Arabia moved to
increased oil production by 1 million barrels of oil per day to 10.5
million barrels with the Crown Prince demanding that the country’s
output increase to 12.5 million barrels daily by 2017.

The
world currently produces just shy of 100 million barrels of oil per
day and market analysts calculate that for every 1%, or 1 million
barrels per oil, that supply exceeds demand oil prices fall by 25%.

At
the time of the market collapse, it was estimated that the market was
over saturated by several million barrels per oil and continues to be
pounded by Saudi overproduction.

Shilling’s
argument is a harbinger of danger to come for oil dependent economies
such as Venezuela, Libya, and Algeria who lack the access to capital
markets necessary to weather a collapse in their oil sector with
policy experts fretting that these countries could fall into
permanent disarray if the analyst’s argument holds true.

The
raw mathematics of Shilling’s argument are most perturbing as he
points to the wildfires in the oil-sands in Canada, output cuts due
to political unrest in Nigeria and Venezuela, and speculation that
the non-state sponsored American hydraulic fracturing industry would
go belly up before the market rebounds.

Accounting
for the excess supply slack once geopolitical chasms quell and as
Canada recovers from the massive Fort McMurray fire that scorched
Alberta’s energy industry, easily an extra 4 million barrels of oil
could come on line within the next few months savaging the industry.

This
also comes at a time when Iran has moved to increase their oil output
in a market share arms race with their regional adversary Saudi
Arabia who increased production with reckless abandon despite driving
prices well below their own breakeven price in a bid to bankrupt oil
companies and entire energy dependent countries.

Fortunately,
there is a major flaw in Shilling’s assessment which assumes that
geopolitical factors that influence production remain constant
despite a rout on oil prices. Notably, the instability of smaller,
less diversified oil producing countries like Venezuela and Algeria
would come to an immediate halt as would, presumably, their entire
governing apparatus bereft of the necessary funds to administer the
state.

Oil
investors know that in addition to breakeven points, all of which
have been clearly trounced in the energy market collapse, there is a
breakdown point – an oil price level that causes so much economic
destruction that the shock itself implies that the market valuation
of the natural resource would immediately rebound.

Oil
Prices Rebound After Saudi Arabia Crashed the Market, But Will it
Last?

Knowing
that a $10 oil price would mean the creation of an immediate oil
shortage of over 10% per day that would send the market skyrocketing
on bounce back over $100 per barrel, investors price the middle point
between the two extremes.

No,
a collapse to $10 per barrel is not likely or even particularly
possible regardless of how much Gary Shilling decides to short the
market and put out opinion pieces to try to recoup some of the losses
on his foolish market bet.